The UK s household debt problem: Is there one? - and if so, who s at risk?

Transcription

1 Presentation, IFS, January 24 th 2007 The UK s household debt problem: Is there one? - and if so, who s at risk? Richard Disney Institute for Fiscal Studies, & Centre for Finance & Credit Markets, School of Economics, University of Nottingham

2 The UK s debt problem? January is a time of short cold days, high winds and also a time of media attention to households debt problems What aspects warrant genuine concern about household debt in the UK? Let s look at: The aggregate data Household data A new book on the economics of the consumer credit industry in Europe and the US

3 The macroeconomic story Household debt in the UK has increased rapidly both secured on property and unsecured ln( m illion) Household Spending and Indebtedness But so have disposable income, assets, wealth Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 ln(household final consumption expenditure) Jun-05 ln(total unsecured household debt) ln(total secured household debt)

4 Secured, rather than unsecured debt should be the current concern? Chart 2 Total Debt as % of Household Disposable Income Secured debt Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Unsecured debt Secured debt as % of HDI Unsecured debt as % of HDI

5 House price increases lead to extra secured debt ( mortgage equity withdrawal ) with a time lag Housing equity withdrawal and house price changes Quarterly changes % per quarter as % of GDP Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun-91 HEW as % of PDI Change in house prices

6 But which are the households at risk? Examine data at the household level on: Use of credit arrangements by type Households self-reported debt problems Evolution of household debt over time: How the pattern has changed over the last 5 years Tracking individual households the life cycle of debt (and wealth) Few household data sets report debt the Family and Children Survey (since 1999) is an ideal, random survey of a panel of (potential) at risk households

7 Our previous research. Research published in Fiscal Studies early in 2004 with colleague Sarah Bridges Used the Survey of Low Income Families 1999: a sample of 5000 families with children: 50% lone parents, 50% low income couples (income not more than 35% higher than tax credit eligibility). The survey was subsequently boosted to a include more representative sample of couples with children (FACS). We update SOLIF families 5 years on (2004) using FACS: The same households (the panel ) Households with same sampling frame in 2004 as 1999 We look at how their debt situation has changed.

8 Our families in 1999* Use of debt instruments 1999 Averages Credit cards 54% Owners 42% Tenants 58% Age: 37 % working: 0.63 No. of children: 2.1 (couples) % in couple:60% Averages Age: 34 % working: 0.33 No. of children: 2.2 (couples) % in couple: 40% Store cards 30% Loans from finance co.s and banks 28% Catalogue/mail order 49% Other 14% Credit cards 15% Store cards 8% Loans from finance co.s and banks 23% Catalogue/mail order 57% Other 26% * That we also observe in 2004

9 Owners in 1999 Use of debt instruments 1999 Use of debt instruments % 31% 64% Credit cards Remain owners by % 29% 49% 14% 24% 17% 34% 8% Store cards Loans from finance co.s and banks Catalogue/mail order Other Become tenants by % 38% 26% 23% 45% 17% 14% 47% 15% 9% 33% 14% Credit cards Store cards Loans from finance co.s and banks Catalogue/mail order Other

10 Tenants in 1999 Become owners by % Remain tenants by % Use of debt instruments % 13% 25% 59% 21% 10% 7% 23% 56% 27% Use of debt instruments % 17% 21% 42% 11% 25% 10% 16% 40% 23% Credit cards Store cards Loans from finance co.s and banks Catalogue/mail order Other Credit cards Store cards Loans from finance co.s and banks Catalogue/mail order Other 14%

11 Summary on use of credit Nearly 60% of our sample of families were tenants in 1999; by 2004 almost half were homeowners Owners use credit cards more than tenants From 1999 to 2004: Increase in use of credit cards among all groups Especially among homeowners, and fastest among those who became homeowners in the period Corresponding reduction in use of inferior types of credit e.g. mail order, catalogues, other (e.g. moneylenders, informal loans) Why more access to superior types of credit? Our sample built up credit history and obtained credit score Home ownership increased (improves credit score) Increased market penetration and better credit scoring methods

12 Household debt problems SOLIF/FACS asks a series of questions about household debt problems. Whether households are unable to make minimum payments on credit/charge/storecards Whether households are unable to keep up with repayments on financial loans, in arrears on utility bills etc. Total value of arrears (mostly on loans/bills) Stress related to financial problems

13 Proportion unable to make payment on cards by household type 1999 & % 1% 10% 4% 3% 1% 7% 3% Owners 1999 Owners 2004 Owners 1999 Tenants 2004 Tenants 1999 Owners 2004 Tenants 1999 Tenants 2004

14 Proportion unable to make repayments on loans by household type 1999 & % Owners 1999 Owners % 5% 3% 1% 3% 1% Owners 1999 Tenants 2004 Tenants 1999 Owners % 7% 5% Tenants 1999 Tenants 2004

15 Proportion in arrears on at least one utility bill or council tax by household type 1999 & % 40% 17% 3% 8% 8% 17% 5% 11% 11% 5% Owners 1999 Owners 2004 Owners 1999 Tenants 2004 Tenants 1999 Owners 2004 Tenants 1999 Tenants 2004

16 Household debt problems Have reduced considerably as sample has aged 5 years Least important debt problems (in incidence) arise from credit/charge/store cards Debt problems are primarily associated with being poor Purchase of house carries risk of problems with utility bills & council tax Revolving arrears Debt problems may also be associated with moving out of home ownership

17 A matched sample Previous results a combination of life cycle and time effects. We can separate these by constructing a matched sample for 2004 with 1999 characteristics (i.e. not 5 years older) (by deflating net incomes in 2004 sample by RPI and taking appropriate cut-offs): Findings: Similar results in most cases In 2004 less use of catalogues and mail order, and financial loans Frequency of utility bill arrears increases slightly but not other financial difficulties.

18 Priorities in policies towards household debt? Cooling-off periods for store cards? Store cards of declining importance? Effective sharing of credit information should cap overall access to credit Banks are too generous in offering credit? Arguably, the problem instead is that some households rely on bad credit and need good credit Credit scoring is getting more sophisticated and this allows identifying of potential clients previously regarded as bad risks Greater importance of secured debt? puts house at risk Bankruptcy alternative too tough, now too lenient??

19 Low income households Size of home credit and unregulated market less clear from surveys. Our data suggest significant in 1999 but becoming less important over time? Looser regulation than credit markets (Farepak) Loans to finance shopping vouchers: APRs >400% are common not regulated? Lack of security/collateral leads to high cost doorstep lending Interest ceilings? OK if eliminates excess APRs but issue is - how to price risk? Doorstep selling generates captive clients? Local credit unions are probably a much better alternative. But regulated sub-prime market provides a route to a better credit score for households.